Israel

In 2026, Israel is set to experience a strong GDP growth rebound at +3.5% y/y as the economy continues to normalize following the 48-month long conflict. In 2027, economic growth is expected to remain elevated at +3.3%. The rebound will be led by the return of normal business activity, especially of the construction and tourism sectors, which suffered the most since October 2023, as well as the labor market overall, which has been strained by shortages due to reservists joining the army and fewer Palestinian workers employed in the Israeli economy. The impacts of the war to Israeli economy are evident in the increase of public debt and the increased premium on government yields.

Inflation is set to remain stable at 2% y/y, within the Central Bank’s target (set between the 1-3% target band). The Israeli Central Bank implemented a second successive cut in January 2026 to 4%, after cutting in November 2025, resuming the easing cycle that had been on hold since early 2024. The easing cycle is expected to continue through 2026 by at least another 50bps if inflation continues to soften. Israel’s delayed easing cycle due to the conflict still has offloading to do as its rate was closer to 0% before the Covid-19 and Ukraine war price shock.  

As the third-largest economy in the Middle East after Saudi Arabia and Türkiye, Israel is a highly open and developed market, with critical capabilities in high-tech goods, business services and defense, as well as a diversified export base and a highly skilled labor force. Annual per capita income exceeds USD50,000, and real GDP has grown at an annual rate of +4% on average over the last 15 years. The Tel Aviv Stock Exchange remains among the most dynamic and diversified in the emerging market class. It has overperformed (100%+) major equity markets across geographies since 2024. 

In recent months, several business reforms have been put in place to balance the economy in the post-war environment, notably a comprehensive high-tech tax reform aimed at enhancing competitiveness, and attracting foreign capital and talent. To offset the increased government deficit, the VAT increased to 18% and a minimum corporate tax framework was adopted (as in other OECD members). Trade developments with the US — Israel’s largest trading partner — could pose headwinds: the US has imposed a 15 % tariff on certain Israeli exports, while Israel has brought down the tariff on US imports to 0%. The special loan-assistance program that Israeli banks adopted early in the war — which let households and businesses defer loan/mortgage repayments with favorable terms — began winding down at the turn of 2025-2026. 

Tourism and construction were among the most impacted sectors and remain constrained by the business environment. Tourism arrivals remain 50% below 2022/23 levels, and well below pre-pandemic levels. Meanwhile, the labor market remains tight and has not fully recovered. Unemployment remains low, while the employment rate shifted up to 61% in late 2025. Total population growth dropped below 1% as net migration was negative, pushing down overall growth and reducing the overall size of the labor market.